Hedge Funds Are Doing Terribly This Year

Hedge funds are designed to stay ahead of the market regardless of whether Wall Street is feeling bullish or bearish. And right now, that would seem to be exactly what they’re not doing.

According to a recent index compiled by Bank of America (NYSE:BAC[1]) Merrill Lynch, since the start of 2012 hedge funds are up just 1.85%, compared with 12% for the S&P 500. Goldman Sachs’s (NYSE:GS[2]) numbers aren’t quite as damning — they calculate that the hedges are up 4.6% — but with the caveat that only 11% of the hedges they monitor have beaten a low-cost S&P index fund.

That means that even with their insane profit levels (2% of assets and a sickening 20% of profits), the fund managers are not delivering on their raison d’etre. The Harvard and Yale Corporations are no doubt displeased.

To be sure, hedge funds have historically experienced downturns during economic recessions[3], only to come roaring back in boom times like the late 80s and mid-90s. But given that Wall Street is currently undergoing a quasi-rally, at least compared to the carnage of four years ago, one begins to wonder just what the fund managers are doing to earn their mega-salaries. Especially when one considers that this would appear to be their third straight losing year.

Interestingly, Alexander Ineichen has compiled a table showing that since 2008, the five-year return rates for hedge funds have beaten those of an imaginary portfolio divided between global stocks and bonds only once, and that was back in 2009. This means that in boom times, hedges are a strong bet, while in bust times, they’re — well, a bust.

All of which raises the question, If hedge funds can’t make money in a tough market like this, what exactly are they hedging against?

The moral of the story: you don’t always get what you pay for. The rich investors, institutions, and pension funds that have socked away their earnings in these behemoths are getting fleeced, paying huge fees for lousy performance.

Meanwhile, we here at Crossing Wall Street continue to beat the market: Our set-and-forget strategy has beaten the S&P 500 for five years in a row, and we could be on our way to #6 this year. Best of all, we don’t run any special club of the you’re-too-small-to-join variety.